NAHB

The Census Bureau and the U.S. Department of Housing and Urban Development said that new housing starts rose 5.2 percent, up from an annualized 1,120,000 in January to 1,178,000 in February. The January starts figure was originally estimated to be 1,099,000 units; therefore, the decline from bad weather in the prior report was not as bad as originally thought. More importantly, these data continue to reflect a housing market that is making slow-but-steady progress in the right direction, particularly over the longer-term. Along those lines, new housing starts have jumped 30.9 percent year-over-year, up from just 900,000 units seen in February 2015. The bulk of that growth stemmed from the single-family segment, which has increased 37.0 percent year-over-year. Read More

Manufacturing production rose 2.6 percent in 2013, slowing from the 3.5 percent and 3.2 percent growth rate experienced in 2011 and 2012, respectively. Yet, the lower 2013 figure stemmed largely from weaknesses in the first half of the year, with manufacturing output rising an annualized 4.2 percent in the second half. As such, the sector ended the year on a strong note, with a pickup in demand and cautious optimism for 2014. Indeed, a number of other reports reached the same conclusion. Surveys from the New York and Philadelphia Federal Reserve Banks and from the Manufacturers Alliance for Productivity and Innovation (MAPI) both observed expanding levels of activity in their latest releases. Respondents to these surveys tended to be mostly upbeat about new orders, shipments, exports and hiring over the coming months—which is definitely good news.

Over the past couple years, the rebound in the housing sector has been one of the bright spots in the U.S. economy. Housing starts were lower in December, but it seems the November data were a bit of an outlier. Absent that soaring figure, new residential construction was generally higher to end 2013, particularly for single-family units. New single-family starts increased 7.6 percent year-over-year. Housing permits also eased slightly in December but increased 4.6 percent from the year before. The reduction in housing activity could have been due to severe winter storms, with somewhat higher borrowing costs as another possible contributing factor. The average 30-year mortgage rose from 4.29 percent in the week of November 27 to 4.48 percent in the week of December 26, according to Freddie Mac. Nonetheless, this still historically low rate helps to explain the generally upbeat assessment of home builders.

Meanwhile, the pace of retail sales slowed in December, with reduced auto sales dragging the overall figure lower. Still, motor vehicle sales increased 5.9 percent in 2013, making it one of the stronger components of consumer spending growth. Excluding autos, retail sales would have risen by 0.7 percent last month, suggesting broader strength than the headline figure implies. On a year-over-year basis, total retail spending increased 4.1 percent, a modest pace that marks the slowest since 2009.

The two measures of sentiment moved in opposite directions. Preliminary data from the University of Michigan and Thomson Reuters on consumer confidence was surprisingly lower for the month, down from 82.5 in December to 80.4 in January. The December data has noted a recovery in perceptions about the economy after falling in the wake of the government shutdown, and the expectation had been for January’s data to extend those gains. With a reduction in sentiment instead, this suggests that the public remains somewhat anxious about economic conditions. At the same time, the National Federation of Independent Business (NFIB) noted an increase in optimism for the second straight month. Underneath the main reading, however, the data were mixed, with more small business owners calling it a “good time to expand” but with sales and earnings remaining subpar.

In terms of news events, outgoing Federal Reserve Chairman Ben Bernanke delivered a speech at the Brookings Institution that provided his take on the lessons learned from the financial crisis. This “exit interview”—as it has been widely dubbed—was mostly a valedictory address defending the Fed’s monetary actions to help stimulate growth in the economy. Coincidently, Bernanke gave it on the same day that the Bureau of Labor Statistics reported that core consumer inflation had risen by just 1.7 percent over the past year. A similar conclusion on producer prices had been released the day before, and in each case, the data suggested that pricing pressures were increasing within an acceptable range, at least for now, according to the Fed’s stated targets.

There will only be a handful of economic data releases this week. From the manufacturing perspective, the highlights will come on Thursday. Markit will provide “flash” estimates for its purchasing managers’ index (PMI) reports for the United States, the Eurozone, and China. In addition, the Kansas City Fed will discuss the latest results of its regional manufacturing survey. In each instance, the expectation will be for manufacturers to note continued growth, building on recent gains. Other data releases include updates on the leading economic index and existing home sales.

Chad Moutray is the chief economist, National Association of Manufacturers.

The U.S. economy grew a surprisingly strong 4.1 percent in the third quarter, according to the most recent revision of real GDP from the Bureau of Economic Analysis. While inventory replenishment accounted for a large portion of this increase, consumer and business spending continue to boost overall economic activity. I expect real GDP growth of 2.5 percent in the current (fourth) quarter, essentially the same pace for 2013 as a whole. For 2014, the economy should expand by 3.0 percent, which would be the first year since 2005 that the annual average would grow by that amount.

A number of data sources supported the view that economic activity has begun to improve, continuing the accelerating pace in the second half of 2013. For instance, manufacturing production rose 0.6 percent in November and 2.9 percent year-over-year. On the latter figure, the annual pace has made definite progress since July’s 1.2 percent pace. The Manufacturers Alliance for Productivity and Innovation (MAPI) predicts that industrial production will accelerate to 3.1 percent in 2014 and perhaps 4.1 percent in 2015.

A number of regional surveys show manufacturers tend to be mostly upbeat about new orders and output in the coming months. This includes the latest reports from the Kansas City, New York and Philadelphia Federal Reserve Banks. The more optimistic future assessment was true despite notable weaknesses in the current environment, particularly in the Kansas City and New York surveys. Similarly, the latest Markit Flash U.S. Manufacturing Purchasing Managers’ Index (PMI) suggested that output growth remained near the more robust pace at the beginning of 2012, with modest growth overall. Meanwhile, we continue to see stabilization in the Chinese and European economies. These releases show hiring growth remains modest at best.

The housing market also bounced back strongly in November. New housing starts soared to 1.09 million units at the annual rate, the highest level since February 2008. Both single-family and multifamily starts were up sharply for the month, and overall, new residential construction has increased nearly 30 percent over the past 12 months. Furthermore, new housing permits have also exceeded 1 million units for two straight months, which should bode well for future activity. The gains in residential activity have also helped to lift homebuilder confidence once more, according to the National Association of Home Builders and Wells Fargo. I expect that housing will continue to be one of the bright spots in the economy, particularly as borrowing costs remain at historic lows and the “sticker shock” of higher rates wears off.

The improvements in the economy have led the Federal Reserve to finally start to pare back its latest quantitative easing program. At the conclusion of its December Federal Open Market Committee (FOMC) meeting, the Federal Reserve decided to begin tapering its purchases of long-term and mortgage-backed securities, down from $85 billion each month to $75 billion starting in January. The expectation is that this will set in motion future reductions in these purchases, with all buying ending sometime in mid-2014. However, the Federal Reserve will still be pursuing a “highly accommodative” monetary policy, with short-term interest rates near zero for the foreseeable future. In his press conference afterward, Federal Reserve Board Chairman Ben Bernanke suggested short-term rates might not move up until after the unemployment rate hits 6.5 percent, which it is not likely to do until the end of 2014. He made a similar comment in his speech to the National Economists Club in November. Fortunately, pricing pressures remain quite low for now, providing the Federal Reserve with more time to pursue its stimulative measures.

This week will be a shortened one due to the Christmas holiday, but there will still be some key data releases. Later this morning, we will get the latest reads on personal spending and consumer confidence, both of great importance in terms of holiday spending. Sentiment had improved in the initial estimate from the University of Michigan and Thomson Reuters, rebounding from the dips in perceptions seen during the government shutdown. This should help retail sales, which have grown modestly of late. We will also learn more about the health of the manufacturing sector with a new report on durable goods sales and the latest survey from the Richmond Federal Reserve Bank.

Chad Moutray is the chief economist, National Association of Manufacturers. Due to the holidays, there will be no report issued during the week of December 30. The schedule will resume on Monday, January 6.

Over the past 12 months, housing permits have risen 29.6 percent, with new single-family construction up 26.2 percent. This is yet another sign that the housing sector’s rebound has continued, even with a bit of a pause in recent months.

Both single-family and multi-family housing starts were up sharply. New single-family construction starts have risen from 580,000 at the annual rate in September to 602,000 in October to 727,000 in November. This was the most single-family starts since March 2008. Multi-family starts have grown from 287,000 in October to 364,000 in November. This was the fastest pace of multi-family starts since February 2008, but it was close to the 363,000 observed in December 2012.

Lower borrowing rates have helped to fuel this growth. For example, the average 30-year fixed-rate mortgage was 4.57 percent during the first week of September, according to Freddie Mac, but it fell to 4.10 percent by the last week of October. It rose to 4.29 percent by the end of November, but in general, Americans have begun to come back into the housing market as rates have fallen and the “sticker shock” of higher rates has become less pervasive. (The average was 3.35 percent as recently as the first week of May.) The surge in November could also be a reaction to the anticipated increase in mortgage rates moving forward, especially with the Federal Reserve beginning to slow its asset purchases soon.

Meanwhile, housing permits declined from 1,039,000 in October to 1,007,000 in November. I would not make too much of this decrease, however, as it stemmed largely from the highly-volatile multi-family sector. Single-family housing permits rose from 621,000 to 634,000, the most since April 2008. Single-family permits have increased 10.5 percent year-over-year, with total permitting up 7.9 percent. Moreover, this was the second month in a row with permits exceeding one million, suggesting the recent pickup has been sustained.

The gains in housing activity have also helped to lift home builder confidence once more. The National Association of Home Builders and Wells Fargo reported that its Housing Market Index rose from 54 in November to 58 in December. This returns the HMI back to where it was in August, suggesting that the recent lull in the housing market has begun to subside.

The larger story is the fact that the HMI has now been over 50 for seven straight months, indicating that more builders are positive than negative in their outlook. This should bode well for the industry as we move into 2014. The indices for current (up from 58 to 64) and expected (up from 60 to 62) single-family sales are a further indication of this. Indeed, the traffic of potential buyers (up from 41 to 44) has picked up, even as it could be more robust.

In conclusion, I expect for the housing market to continue to expand as we move into the new year, with the housing starts and permits data encouraging overall. With that said, I also anticipate higher (but still historically low) mortgage rates in the months ahead. It will be interesting to see how increased borrowing costs might dampen demand. Nonetheless, I still feel that housing will remain a bright spot, particularly with improvements in the economy and home buyers becoming more accustomed to the “new normal” in mortgage rates.

Chad Moutray is the chief economist, National Association of Manufacturers.

On the positive side, though, it was the sixth consecutive month with the HMI above the threshold of 50, the level at which more builders were optimistic than pessimistic in their outlook. Indeed, the longer-term trend for builder confidence is more upbeat, with the HMI up from 19 in November 2011 and 45 in November 2012. Indeed, the 58 reading of August was the highest level of sentiment among builders since November 2005, with respondents not far from that level despite the recent easing.

The November data were somewhat mixed, with weaker builder confidence in the Midwest and West outweighing strength in the Northeast and South. While the traffic of potential buyers has decelerated at bit, those builders taking the survey still expect relatively strong single-family sales over the next six months (down from 68 in August to 61 in October to 60 in November).

With the recent government shutdown, it has been a while since we have received housing starts and permits data from the Census Bureau. In fact, the most recent data were released on September 18, with a new report slated to come out next week on November 26. The consensus estimate for October housing starts is around 910,000, which would be a slight improvement over August’s 891,000 figure. Yet, this would still be below the one million mark achieved in March.

Home buyers are getting used to the “new normal” in terms of borrowing costs, and once Americans move past their “sticker shock” of higher rates, the housing market should stabilize and begin to expand again. Freddie Mac said that the average 30-year mortgage rate in the last week of October was 4.10 percent. This was better than 4.57 percent observed during the week of September 12 (before the Federal Reserve decided not to taper its asset purchases as expected), but it was still higher than the 3.35 percent average recorded during the first week of May. The average 30-year mortgage rate last week was 4.35 percent.

Chad Moutray is the chief economist, National Association of Manufacturers.

Yet, the recent dip in the builder sentiment is also notable, and it mirrors the pullback in larger housing construction and sales figures. While we will not get new residential starts and permits data tomorrow due to the government shutdown, the most recent data have reflected a modest decline since the spring months. The NAHB estimates that housing starts would have been between 875,000 and 900,000 in September. This would be similar to the August figure of 891,000, which was below the one million mark achieved in March.

Higher borrowing costs and the current political stalemate were behind the lower figures. NAHB Chief Economist David Crowe said, “A spike in mortgage interest rates along with the paralysis in Washington that led to the government shutdown and uncertainty regarding the nation’s debt limit have caused builders and consumers to take pause.” He went on to suggest that he expected residential activity to pick up again in the coming months, particularly with historically-low interest rates and continued pent-up housing demand.

The August data, though, did reflect lower levels of home builder confidence in each region of the country. The largest declines in sentiment were seen in the Northeast. The good news was the single-family sales over the next six months are expected to be strong, albeit at a slower pace than a couple months ago. The index of expected single-family sales has declined from 68 in August to 64 in September to 62 in October.

Chad Moutray is the chief economist, National Association of Manufacturers.

Yet, despite the increase in July, it is also clear that the jump in borrowing costs is beginning to have an impact. According to Freddie Mac, the average 30-year mortgage rate at the beginning of May was 3.35 percent, but that has risen to 4.40 percent this week – a jump of more than one full percentage point. Not surprisingly, new single-family residential construction has pulled back somewhat as a result, down from 604,000 in June to 591,000 in July. In February, single family starts peaked at 652,000, a level not seen since May 2008, illustrating the recent easing. To be fair, the long-term trend remains positive, with single-family starts up 15.4 percent year-over-year.

The monthly increase in residential construction activity resulted mainly from the rise in multi-family unit starts, up from 242,000 to 305,000. The multi-family segment has been extremely volatile, and in the past 12 months, it has ranged from 212,000 in August to 382,000 in March. Indeed, much of the 7.9 percent decline in June in overall housing starts could be explained by the drop in the multi-family unit number. Even with the volatile figures, there is a clear upward trend, increasing 33.2 percent year-over-year.

At the same time, housing permits were also higher, up from 918,000 in June to 943,000 in July. New residential permits have trended lower since passing the one million mark in April. The data tend to mirror the housing starts figures, with single-family permitting lower (down from 625,000 to 613,000) and multi-family activity higher (up from 293,000 to 330,000). Overall, housing permits have increased 12.4 percent year-over-year, with even stronger growth among single-family units, up 17.9 percent.

To summarize, housing continues to be a major driver of recent economic growth, with residential construction rebounding from its lows after the financial crisis. Both housing starts and permits have great strides, particularly over the past couple years. Nonetheless, the July data also point out the effects of higher mortgage rates, dampening demand for single-family homes in particular. While the longer-term trend in housing should continue, the increase in borrowing costs will no doubt lessen the pace of that upward march. Still, the prospects for growth and for housing starts to once again surpass one million remain good.

Perhaps with this in mind, home builder confidence continues to rise. The National Association of Home Builders (NAHB)’s Housing Market Index (HMI) increased from 56 in July to 59 in August. The last time the HMI was at that level was November 2005. Moreover, this was the third consecutive month with the index over 50 – the threshold in which more builders are optimistic than pessimistic. The HMI has increased significantly over the course of the past two years, with readings of 15 and 37 in August 2011 and August 2012, respectively. Looking forward, the index of single-family sales over the course of the next six months increased has increased from 50 six months ago (February) to 67 in July to 68 in August. This should bode well for growth.

Even with this more-optimistic view of the second half of the year, higher mortgage rates could dampen growth in this important sector. We will be closely watching housing starts and permits data for July to see if increased borrowing costs further ease activity.

Chad Moutray is the chief economist, National Association of Manufacturers.

The largest factor behind the decline in housing starts was the plummeting of multi-family housing starts, down from 398,000 in March to 243,000 in April. These declines appear to have taken place in all regions of the country except for the Midwest. Multi-family starts nationally are now slightly lower than they were 12 months ago, reversing the healthy gains seen in recent months. Meanwhile, new single-family construction starts decreased less dramatically, down from 623,000 to 610,000. These losses were primarily in the South. The year-over-year pace for single-family starts is still quite impressive, up 20.8 percent.

At the same time, housing permits soared to 1,017,000 annualized units in April from 890,000 in March. The permits data are important because they serve as a proxy for future construction activity, and as such, they allow us to get less worried about the declines in starts. The good news is that this is the first time that housing permits have been above 1 million since June 2008 (when they were headed lower). The year-over-year growth in housing permits between April 2012 and April 2013 was a very healthy 35.8 percent. Read More

Looking at specific regions, there was continued progress in December in the Northeast and Midwest, with a slight downtick in the South and West. All regions have seen steady progress, though, over the past few months. Nationally, single-family sales volume increased from 49 to 51 in the month (up from 41 in October). The traffic of potential buyers was also higher.

NAHB Chief Economist David Crowe said, “While there is still much room for improvement, the consistent upward trend in builder confidence over the past year is indicative of the gradual recovery that has been taking place in housing markets nationwide and that we expect to continue in 2013.” At the same time, tougher lending standards and still-weak financial conditions continue to hold back faster growth.

Tomorrow, the Census Bureau releases new housing starts and permits data. Last month, housing starts rose to 894,000, and they have risen almost 42 percent year-over-year. While the consensus estimate for new residential construction is for 875,000 units, overall housing data continue to reflect a longer-term upward trend.

Chad Moutray is chief economist, National Association of Manufacturers.